1 January 2011

Day One

New Year’s Day, 2011 is the 1st January 2011 or 1-1-11 for short. So it really is Day One. The first day of a new decade is always exciting so what does this decade presage. It is very hard to foresee what may happen in a specific twelve month period but perhaps not so difficult to see what will happen over ten years though I would not hazard to say in which particular year the events might happen. At first sight it might seem that the Four Horsemen of the Apocalypse are getting up a fair head of steam. Conquest, War, Famine and Death are represented in the Book of Revelations as if the world will come to an end but the truth about the human condition is that these are all permanent features.

Over the past decade we have had the horror of 9.11 and the appalling response to that which has led to a ten year war in Afghanistan that shows no sign of end, the shocking crimes committed in Iraq and many other flash points. One can look at the Korean peninsula, the muscle flexing of Iran and China in their own different ways, the permanent issue of shoehorning two opposing tribes into the same Land whether it’s called Palestine or Israel. But at the annual Churchill lecture I attended recently at the Guildhall, Baron Guthrie of Craigiebank, distinguished former General and Chief of Staff, sees the Indian - Pakistani conflict as the most dangerous. Both sides have nuclear weapons. Both governments are weak. There are many traditional rivalries and some new ones over borders and resources leading to frequent border incidents and I would have to agree with him.

But we in the so-called West cannot be complacent as governments are in trouble wherever you look in the developed world. I don’t think it’s an exaggeration to say that democracy is in crisis. And as Churchill said “Democracy is the worst form of government except for all those others that have been tried.”

But this is hardly a ringing endorsement. Democracy is supposed to have an ancient tradition being first practised by the Ancient Greeks but they would not have recognised what we call democracy. They distinguished democracy, rule by the people, from autocracy, rule by a single person, but the people were only those men who held property, or if you like had a stake in the system. In England we are proud of our democratic tradition dating it back to Magna Carta but most of this document is about the restriction of the King’s powers versus the great landowners, the barons. The modern concept of universal suffrage in which everyone over a certain age, first 21 now commonly 18, has a vote whether or not he/she has a stake in the system through property or a job, whether or not they are educated or even literate is in historical terms still quite new. The only ones who are excluded are the Royal Family, members of the House of Lords and those in prison and even that has been challenged in the courts.

The problem is that the democratic politicians give stuff away to get elected; in plain words they bribe the electorate. Over time this has built up a level of debt that is unaffordable and now the whole developed world is in this position. It has to be reformed but that can only be done by taking back what has been promised and that only leads to less confidence in the system. I therefore predict that in the next decade we will see a series of challenges to the system with which we are familiar. Meanwhile the Chinese who do not have this problem can continue to make progress developing their own version of state controlled capitalism.

The recent flurry of leaks of official communication in the irresponsible media has put both of these situations, war and democracy, at further risk. Wikileaks is an appalling attack on responsible government. It has increased the chance of war because war is best avoided by confidential discussion between nations through experienced diplomats. The Cuban missile crisis was defused by skilled diplomacy. If the Russian ambassador to Washington and the State department had thought that their exchanges might later be leaked to the public, war might not have been averted. Equally democracy can only survive if we can trust our politicians. That is already under pressure but now it seems to be fair game to print any old gossip and thus destroy the basis of trust between the elected and the electorate.

The banking crisis of 2007-9 will return. Why? Because none of the problems that caused it have been addressed. Worse the incidence of moral hazard has increased as central banks have pumped liquidity into the commercial banks which they can relend at much higher rates making easy returns and paying themselves vast bonuses for this idiotically simple business. I have sympathy with the banks in one respect. They are being asked to strengthen their balance sheets to avoid one of the causes of the previous crisis. At the same time they are widely criticised for not lending to help restore growth. They cannot do both but irresponsible politicians who may or may not understand what they are saying attack them for this apparent duplicity.The last crisis was a failure of the banks and of their regulators. Neither has responded sensibly and so it will happen again.

So far this blog probably seems pretty negative and I have not even touched on global warming, shortages of energy, water, minerals, food and other key resources, over population and other esoteric hazards like the disturbing decline in the bee population. Suffice it to say that these trends are all negative and I think there will be several crises under each of these headings in the coming years. It will need this to happen for the public at large to wake up to the need to change behaviour and for the politicians to take the courage to take the necessary actions to start to deal with the issues. Regulation works in this area and private industry will respond to both regulatory mandate and to consumer pressure. I see positive signs of that with some of the best companies making remarkable commitments to sustainable development and I think this debate is more in the balance. i.e. there will be problems, but also there will be solutions.

The astute business man will respond to all these challenges by first taking the opportunity to reflect on the macro-economic situation and then how your own organisation fits into the picture. After the worst economic crisis in living memory there are some signs of recovery with the BRIC countries leading the way. A new force of emerging markets is developing well behind them. The Western developed world still looks sluggish with a crisis in government everywhere you look. In the UK recovery is under way but from a position well below the peak in 2007. All the growth needs to come from the private sector. It’s done it before but at a time of much less regulation and state interference. Banks will continue to struggle to reconcile two conflicting objectives of rebuilding their balance sheets to a more secure level while increasing their lending to business to stimulate the recovery. CEOs need to ensure that their balance sheets are strong, their strategic positioning clear, their management aligned and focused, and their service to customers best in class.